NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF JULY 31, 2018 AND JANUARY 31, 2018
AND
FOR THE THREE AND SIX MONTHS ENDED JULY 31, 2018 AND 2017
1.
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
As
of July 31, 2018, InnSuites Hospitality Trust (the “Trust”, “IHT”, “we”, “us”
or “our”) is a publicly traded company with continuing operations of hotels IHT owns and manages.. The Trust and its
shareholders owns interests directly in and through a partnership interest, three hotels with an aggregate of 424 suites in Arizona
and New Mexico (the “Hotels”) operated under the federally trademarked name “InnSuites Hotels” or “InnSuites”.
On July 31, 2018, the Trust entered into a sale agreement to sell its Yuma Hotel property. As a result, the Trust has reported
the assets and liabilities of the Yuma operations as held for sale in the accompanying condensed consolidated balance sheet at
July 31, 2018 and restated prior year January 31, 2018 (see Note 10).
Hotel
Operations – Continuing Operations:
Full
service hotels often contain upscale full-service facilities with a large volume of full service accommodations, on-site full-service
restaurant(s), and a variety of on-site amenities such as swimming pools, a health club, children’s activities, ballrooms
and on-site conference facilities. Moderate or limited service hotels are small to medium-sized hotel establishments that offer
a limited amount of on-site amenities. Most moderate or limited service establishments may still offer full service accommodations
but lack leisure amenities such as an on-site restaurant or a swimming pool. We consider our Tucson, Arizona hotel and our hotel
located in Albuquerque, New Mexico to be moderate or limited service establishments. IHT’s owned properties are limited
service hotels. IHT provides management services on a wide variety of hotels.
The
Trust is the sole general partner of RRF Limited Partnership, a Delaware limited partnership (the “Partnership”),
and owned a 74.94% and 74.80% interest in the Partnership as of July 31, 2018 and January 31, 2018, respectively. As of July 31,
2018, the Partnership owned a 51.01% interest in an InnSuites® hotel located in Tucson, Arizona. The Trust owns a direct 12.79%
interest in a Yuma, Arizona hotel property, and a direct 20.33% interest in an InnSuites
®
hotel located in Albuquerque,
New Mexico.
Under
certain management agreements, InnSuites Hotels Inc., our subsidiary, manages the Hotels’ daily operations. The Trust also
provides the use of the “InnSuites” trademark to the Hotels through wholly-owned InnSuites Hotels. All such expenses
and reimbursements between the Trust, InnSuites Hotels and the Partnership have been eliminated in consolidation.
IBC
Hospitality Technologies – Discontinued Operations:
InnDependent
Boutique Collection (“IBC”, “IBC Hotels”, “IBC Hospitality” or “IBC Hospitality Technologies”),
a wholly-owned subsidiary of InnSuites Hospitality Trust as of July 31, 2018 has subsequently been sold on August 1, 2018 (see
Note 10), has a network of approximately 2,000 unrelated hospitality properties with proprietary software exclusive marketing
distribution and services as well as brand-like cost savings solutions to independent boutique hotels and alternative lodging
(serviced apartments, B&B’s, villas and multi-unit ownership/management of luxury private residences). Additionally,
IBC provides software and solutions to a variety of branded hotels looking to increase direct bookings and receive full guest
information IBC’s patent-pending loyalty program allows consumers to book highly discounted travel when logged in and shopping
for lodging on
www.ivhtravel.com.
IVHTravel.com and its proprietary booking engine has over 1.1 million lodging choices
globally and provides add-on capability for activities, rental car and cancellation protection with airfare on its roadmap in
2019.
Pursuant
to ASC 205-20 Discontinued Operations, the Trust has determined that IBC shall be reported in the accompanying condensed consolidated
financial statements as discontinued operations (see Note 10).
Intellectual
Property
In
order to provide our previous business to business solutions thru IBC and our previous business to consumer solutions thru IVH,
we used software, business processes and proprietary information to carry out our previous business. These assets including related
intellectual property rights, copyrights and website domains were part of the sale to a third party on August 1, 2018 and have
be reported in the accompanying condensed consolidated balance sheet at July 31, 2018 and January 31, 2018 as assets held under
discontinued operations (see Note 10).
InnSuites
Hospitality Trust relies on the combination of patent, copyright, trade secret and trademark laws, confidentiality procedures
and contractual provisions to protect these assets and we license software and other intellectual property both to and from third
parties. Intellectual property assets are considered a valuable part of our business and have become a value-add portion of the
services we provide. We consider our intellectual property assets a valuable asset to our business and we renew appropriate registrations
and regularly monitor potential infringements of these assets.
PRINCIPLES
OF CONSOLIDATION AND BASIS OF PRESENTATION
These
consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles
in the United States of America (GAAP), and include all assets, liabilities, revenues and expenses of the Trust and its wholly-owned
subsidiaries and consolidated variable interest entities. All material intercompany transactions and balances have been eliminated.
The Trust exercises unilateral control over the Partnership and the entities listed below. Therefore, the financial statements
of the Partnership and the entities listed below are consolidated with the Trust, and all significant intercompany transactions
and balances have been eliminated.
|
|
IHT
OWNERSHIP %
|
|
ENTITY
|
|
DIRECT
|
|
|
INDIRECT
(i)
|
|
Albuquerque
Suite Hospitality, LLC (see Note 6)
|
|
|
20.33
|
%
|
|
|
-
|
|
Tucson
Hospitality Properties, LLLP
|
|
|
-
|
|
|
|
51.01
|
%
|
Ontario
Hospitality Properties, LLLP (sold in June, 2017)
|
|
|
99.60
|
%
|
|
|
-
|
|
Yuma
Hospitality Properties, LLLP (see Note 6 and 10)
|
|
|
12.79
|
%
|
|
|
-
|
|
Tucson
Saint Mary’s Hospitality LLC
|
|
|
-
|
|
|
|
83.66
|
%
|
RRF
Limited Partnership (“RRF”)
|
|
|
74.90
|
%
|
|
|
-
|
|
InnSuites
Hotels Inc.
|
|
|
100.00
|
%
|
|
|
-
|
|
IBC
Hotels, LLC (including dba International Vacation Hotels) (Sold August 1, 2018)
|
|
|
99.90
|
%
|
|
|
0.10
|
%
|
(i)
Indirect ownership is through the Partnership
PARTNERSHIP
AGREEMENT
The
Partnership Agreement of the Partnership provides for the issuance of two classes of Limited Partnership units, Class A and Class
B. Class A and Class B Partnership units are identical in all respects, except that each Class A Partnership unit is convertible
into one newly-issued Share of Beneficial Interest of the Trust at any time at the option of the particular limited partner. The
Class B Partnership units may only become convertible, each into one newly-issued Share of Beneficial Interest of the Trust, with
the approval of the Board of Trustees, in its sole discretion. On July 31, 2018 and January 31, 2018, 211,708 and 235,812 Class
A Partnership units were issued and outstanding, representing 1.67% and 1.85% of the total Partnership units, respectively. Additionally,
as of July 31, 2018 and January 31, 2018, 2,974,038 Class B Partnership units were outstanding to James Wirth, the Trust’s
Chairman and Chief Executive Officer, and Mr. Wirth’s affiliates. If all of the Class A and B Partnership units were converted
on July 31, 2018 and January 31, 2018, the limited partners in the Partnership would receive 3,185,746 and 3,209,850 Shares of
Beneficial Interest of the Trust. As of July 31, 2018 and January 31, 2018, the Trust owns 9,527,448 general partner units in
the Partnership, representing 74.94% and 74.80% of the total Partnership units, respectively.
LIQUIDITY
Our
principal source of cash to meet our cash requirements, including distributions to our shareholders, is our share of the Partnership’s
cash flow, quarterly distributions from the Albuquerque, New Mexico and Yuma, Arizona properties and more recently, sales of non-controlling
interests in certain of our Hotels. The Partnership’s principal source of cash flow is quarterly distributions from the
Tucson, Arizona properties. Our liquidity, including our ability to make distributions to our shareholders, will depend upon our
ability and the Partnership’s ability to generate sufficient cash flow from hotel operations and to service our debt.
With
approximately $3,700,000 of cash and short term investments, as of July 31, 2018, the availability of a $1,000,000 related party
Demand/Revolving Line of Credit/Promissory Note, and the availability of the combined $1,000,000 Advance to Affiliate credit facilities,
we believe that we will have enough cash on hand to meet all of our financial obligations as they become due for at least the
next year. In addition, our management is analyzing other strategic options available to us, including the refinancing of another
property or raising additional funds through additional non-controlling interest sales; however, such transactions may not be
available on sales of properties terms that are favorable to us, or at all.
There
can be no assurance that we will be successful in obtaining extensions, refinancing debt or raising additional or replacement
funds, or that these funds may be available on terms that are favorable to us. If we are unable to raise additional or replacement
funds, we may be required to sell certain of our assets to meet our liquidity needs, which may not be on terms that are favorable.
Please
see related party footnote at Note 4 regarding additional liquidity items.
BASIS
OF PRESENTATION
The
condensed consolidated balance sheet as of January 31, 2018, which has been derived from audited consolidated financial statements,
and these unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”). Certain information related to the Trust’s organization, significant
accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”) has been condensed or omitted. The accounting policies
followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed
in the Trust’s annual consolidated financial statements for the year ended January 31, 2018, as filed on Form 10-K. In the
opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting
only of normal recurring adjustments, necessary to fairly state our financial position, results of operations and cash flows for
the periods presented and the presentations and disclosures herein are adequate when read in conjunction with the Trust’s
Form 10-K for the year ended January 31, 2018.
As
sole general partner of the Partnership, the Trust exercises unilateral control over the Partnership, and the Trust owns all of
the issued and outstanding classes of shares of InnSuites Hotels Inc. Therefore, the financial statements of the Partnership and
InnSuites Hotels Inc. are consolidated with the Trust, and all significant intercompany transactions and balances have been eliminated.
Under
Accounting Standards Codification (“ASC”) Topic 810-10-25, Albuquerque Suite Hospitality, LLC and Yuma Hospitality
Properties LLLP have been determined to be variable interest entities with the Partnership as the primary beneficiary (see Note
7 – “Variable Interest Entity”). Therefore, the financial statements of Albuquerque Suite Hospitality, LLC and
Yuma Hospitality Properties, LLP are consolidated with the Partnership and the Trust, and all significant intercompany transactions
and balances have been eliminated.
On
August 1, 2018, the Trust solds its interest in its wholly owned subsidiary IBC Hospitality Technologies and IVHTravel.com. As
a result of the sale, the Trust has reported the operations of IBC as of July 31, 2018 and restated prior year January 31, 2018
as discontinued operations in the accompanying condensed balance sheet, statement of operations and cash flows (see Note 10).
On July 31, 2018, the Trust entered into a sale agreement to sell its Yuma Hotel property. As a result, the Trust has reported
the assets and liabilities of the Yuma operations as held for sale in the accompanying condensed balance sheet at July 31, 2018
and restated prior year January 31, 2018 (see Note 10).
CORRECTION
OF ERROR
The
management of Innsuites Hospitality Trust determined, after discussions with our independent registered public accounting firm,
that based on a review of the Company’s accounting for certain revenue and expense transactions related to our former subsidiary
IBC during the first quarter period ended April 2018 were not properly accounted for and the related revenues previously reported
were misstated. In addition, certain liabilities were incorrectly recorded during the first quarter April 2018.
During
the first quarter period ended April 30, 2018, we improperly recognized revenue and liabilities related to certain pass through
transactions which did not belong to IBC. As a result of our analysis, we have concluded that these revenues, expenses and liabilities
should not have been recorded. Accordingly, the revenue balances for IBC have been restated as follows: Revenue as reported was
approximately $345,000; Revenue as adjusted is approximately $131,000; Revenue was overstated by approximately $214,000. In addition,
expenses as reported were approximately $890,000; Expenses are adjusted is approximately $728,000; as a result, expenses
were overstated by approximately $162,000. As a result, operating loss for IBC as restated is approximately $598,000 and as reported
was approximately $546,000. Management believes the restatements had no material impact on our reported net loss per share of
$0.03. On August 1, 2018, IBC has been sold and the current and historical financial information has been presented as discontinued
operations in the accompanying condensed balance sheet and statements of operations.
SEASONALITY
OF THE HOTEL BUSINESS
The
Hotels’ operations historically have been somewhat seasonal. The southern Arizona hotels experience their highest occupancy
in the first fiscal quarter and, to a lesser extent, the fourth fiscal quarter. The second fiscal quarter tends to be the lowest
occupancy period at the southern Arizona hotels. This seasonality pattern can be expected to cause fluctuations in the Trust’s
quarterly revenues. The hotel located in New Mexico historically experience their most profitable periods during the second and
third fiscal quarters (the summer season), providing some balance to the general seasonality of the Trust’s hotel business.
The
seasonal nature of the Trust’s business increases its vulnerability to risks such as labor force shortages and cash flow
issues. Further, if an adverse event such as an actual or threatened terrorist attack, international conflict, data breach, regional
economic downturn or poor weather conditions should occur during the first or fourth fiscal quarters, the adverse impact to the
Trust’s revenues could likely be greater as a result of its southern Arizona seasonal business.
Reclassifications
Certain
amounts in previously issued financial statements have been reclassified to conform to the presentation following the sale of
IBC, which includes the reclassification of the combined financial position and results of operations of IBC as discontinued operations
(see Note 10) for all periods presented.
Certain
amounts in previously issued financial statements have been reclassified to conform to the presentation following the potential
sale of Yuma Hotel, which includes the reclassification of the combined financial position as assets and liabilities held for
sale (see Note 10) for all periods presented.
Discontinued
Operations
Pursuant
to ASC 205-20 Discontinued Operations, in determining whether a group of assets that is disposed (or to be disposed) should be
presented as a discontinued operation, we analyze whether the group of assets being disposed represents a component of the Company;
that is, whether it had historic operations and cash flows that were clearly distinguished, both operationally and for financial
reporting purposes. In addition, we consider whether the disposal represents a strategic shift that has or will have a major effect
on our operations and financial results. The results of discontinued operations, as well as any gain or loss on the disposal,
if applicable, are aggregated and separately presented in our consolidated statements of operations, net of income taxes. The
historical financial position of discontinued operations are aggregated and separately presented in our accompanying condensed
consolidated balance sheets.
RECENTLY
ISSUED ACCOUNTING GUIDANCE
Adopted
Accounting Standards
In
January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
.
The update provides that when substantially all the fair value of the assets acquired is concentrated in a single identifiable
asset or a group of similar identifiable assets, the set is not a business. This update is effective for annual and interim periods
beginning after December 15, 2017, and interim periods within that reporting period. We adopted this ASU on February 1, 2018 and
the impact on our consolidated financial statements will depend on the facts and circumstances of any specific future transactions.
In
March 2016, the FASB issued ASU No. 2016-09 (“ASU 2016-09”),
Compensation - Stock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting.
This ASU is intended to simplify several aspects of the accounting for share-based
payment transactions, including the accounting for income taxes, forfeitures and statutory withholding requirements, as well as
classification in the statement of cash flows. One of the provisions of this ASU requires entities to make an accounting policy
election with respect to forfeitures of share-based payment awards, and we have elected to account for forfeitures as they occur
and adopted this provision of ASU 2016-09 using a modified retrospective approach which had no impact on our financial statements.
Additionally, we have applied the provisions of this ASU on a retrospective basis in our consolidated statements of cash flows,
which includes presenting: (i) excess tax benefits as an operating activity, which were previously presented as a financing activity;
and (ii) cash payments to tax authorities for employee taxes when shares are withheld to meet statutory withholding requirements
as a financing activity, which were previously presented as an operating activity. We adopted ASU 2016-09 as of February 1, 2018
in which the adoption had no material impact on our consolidated financial statements.
In
August 2016, the FASB issued ASU No. 2016-15 (“ASU 2016-15”),
Statement of Cash Flows (Topic 230) - Classification
of Certain Cash Receipts and Cash Payments.
This ASU addresses eight specific cash flow issues with the objective of reducing
the existing diversity in practice. In November 2016, the FASB issued ASU No. 2016-18 (“ASU 2016-18”),
Statement
of Cash Flows (Topic 230) - Restricted Cash
. This ASU requires amounts generally described as restricted cash and restricted
cash equivalents to be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts
shown on the statement of cash flows. The provisions of both ASUs are effective for reporting periods beginning after December
15, 2017 and are to be applied retrospectively; early adoption is permitted. We adopted this standard on February 1, 2018. The
adoption of ASU 2016-15 and 2016-18 did not have a material effect on our consolidated financial statements.
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”)
No. 2014-09. “Revenue from Contracts with Customers.” This new standard will replace the existing revenue recognition
guidance in GAAP. The core principle of the ASU is the recognition of revenue for the transfer of goods and services equal to
the amount an entity expects to receive for those goods and services. This ASU requires additional disclosures about the nature,
amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and
estimates and changes in those estimates. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contacts with Customers:
Deferral of the Effective Date” that delayed the effective date of ASU 2014-09 by one year to February 1, 2018, as the Trust’s
annual reporting period is after December 15, 2017.
The
Trust has evaluated the impact of the new standard on its financial results based on an inventory of the Trust’s current
contacts with customers. The Trust has obtained an understanding of the new standard and starting February 1, 2018, the Trust
changed its accounting policy to record prepaid reservations on a net basis. Upon adoption of the new standard, for the Trust
there is no effect on retained earnings.
The
Trust will continue to evaluate the impact of ASU No. 2014-09 on our financial results with the adoption of the standard on February
1, 2018, including its internal processes and control environment for new requirements under the new standard. The standard
allows for both retrospective and
prospective methods
.
The Trust has adopted the modified retrospective method.
This
ASU has become effective for the Trust beginning interim period February 1, 2018. Based on our evaluation of the new revenue recognition
standard the Trust presents revenue on a net basis for the period beginning February 1, 2018.
Accounting
Standards Not Yet Adopted
In
February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”),
Leases (Topic 842)
, which supersedes existing
guidance on accounting for leases in
Leases (Topic 840)
and generally requires all leases, including operating leases,
to be recognized in the statement of financial position as right-of-use assets and lease liabilities by lessees. The provisions
of ASU 2016-02 are to be applied using a modified retrospective approach and are effective for reporting periods beginning after
December 15, 2018; early adoption is permitted. In July 2018, the FASB issued ASU 2018-10 “
Codification Improvements
of Topic 842, Leases
” and ASU No. 2018-11,“
Leases (Topic 842
):
Targeted Improvements.”
ASU
2018-11 provides companies another transition method in addition to the existing transition method by allowing entities to initially
apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained
earnings in the period of adoption. The consideration in the contract is allocated to the lease and nonlease components on a relative
standalone price basis (for lessees) or in accordance with the allocation guidance in the new revenue standard (for lessors).
ASU 2018-11 also provides lessees with a practical expedient, by class of underlying asset, to not separate nonlease components
from the associated lease component. If a lessee makes that accounting policy election, it is required to account for the nonlease
components together with the associated lease component as a single lease component and to provide certain disclosures. Lessors
are not afforded a similar practical expedient. The Trust is evaluating the effect ASU 2016-02, 2018-10 and 2018-11 will have
on its consolidated financial statements and disclosures and has not yet determined the effect of the standard on its ongoing
financial reporting at this time.
In
June 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-07,
Compensation – Stock Compensation
(Topic 718) Improvements to Nonemployee Share-Based Payment Accounting
. This ASU expands the scope of Topic 718 to include
share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this ASU will become effective
for us beginning January 1, 2019, and early adoption is permitted. We do not anticipate that this ASU will have a material effect
on our consolidated financial statements.
In
January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04,
Intangibles - Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment
. The update simplifies how an entity is required to test goodwill for impairment
by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair
value of a reporting unit’s goodwill with the carrying amount. This update is effective for annual and interim periods beginning
after December 15, 2019, and interim periods within that reporting period. While we are still in the process of completing our
analysis on the impact this guidance will have on the consolidated financial statements and related disclosures, we do not expect
the impact to be material.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE
OF ESTIMATES
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The
Trust’s operations are affected by numerous factors, including the economy, competition in the hotel industry and the effect
of the economy on the travel and hospitality industries. The Trust cannot predict if any of the above items will have a significant
impact in the future, nor can it predict what impact, if any, the occurrence of these or other events might have on the Trust’s
operations and cash flows. Significant estimates and assumptions made by management include, but are not limited to, the estimated
useful lives of long-lived assets and recoverability of long-lived assets and the fair values of the long-lived assets and collectability
of advances and notes receivables..
PROPERTY,
PLANT AND EQUIPMENT AND HOTEL PROPERTIES
Furniture,
fixtures, building improvements and hotel properties are stated at cost and are depreciated using the straight-line method over
estimated lives ranging up to 40 years for buildings and 3 to 10 years for furniture and equipment.
Construction
in progress, consisting of hotel land redevelopment costs, hotel pre-renovation costs, hotel renovation costs, interest incurred
on financing, architectural plans, is not depreciated until the related asset is placed in service. The balance of construction
in progress at July 31, 2018 was approximately $280,000, which management believes will be placed into service during the third
quarter ended November 30, 2018. The majority of the construction in progress as of July 31, 2018 related to the renovation costs
associated with the Tucson hotel property. The expected remaining cost of the Tucson renovation is approximately $300,000 at July
31, 2018. The renovation of the Tucson Hotel property is expected to be completed by October 1, 2018.
Management
applies guidance ASC 360-10-35, to determine when it is required to test an asset for recoverability of its carrying value and
whether an impairment exists. Under ASC 360-10-35, the Trust is required to test a long-lived asset for impairment when there
is an indicator of impairment. Impairment indicators may include, but are not limited to, a drop in the performance of a long-lived
asset, a decline in the hospitality industry or a decline in the economy. If an indicator of potential impairment is present,
then an assessment is performed of whether the carrying amount of an asset exceeds its estimated undiscounted future cash flows
over its estimated remaining life.
If
the estimated undiscounted future cash flows over the asset’s estimated remaining life are greater than the asset’s
carrying value, no impairment is recognized; however, if the carrying value of the asset exceeds the estimated undiscounted future
cash flows, then the Trust would recognize an impairment expense to the extent the asset’s carrying value exceeds its fair
value, if any. The estimated future cash flows are based upon, among other things, assumptions about expected future operating
performance, and may differ from actual cash flows. Long-lived assets evaluated for impairment are analyzed on a property-specific
basis independent of the cash flows of other groups of assets. Evaluation of future cash flows is based on historical experience
and other factors, including certain economic conditions and committed future bookings. Management impaired these assets during
the fiscal year 2018, and has determined that no further impairment is required of long-lived assets for the fiscal period ending
July 31, 2018.
REVENUE
RECOGNITION
Hotel
and Operations – Continuing Operations:
ASU
2014-09 (Topic 606), “Revenue from Contracts with Customers” is effective for reporting period after January 1, 2018.
ASU 2014-09 requires entities to recognize revenue through the application of a five-step model, which includes identification
of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction
price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations.
Revenues
are primarily derived from the following sources and are recognized as services are rendered and when collectability is reasonably
assured. Amounts received in advance of revenue recognition are considered deferred liabilities.
Revenues
primarily consist of room rentals, food and beverage sales, management and trademark fees and other miscellaneous revenues from
our properties. Revenues are recorded when rooms are occupied and when food and beverage sales are delivered. Management and trademark
fees from non-affiliated hotels include a monthly accounting fee and a percentage of hotel room revenues for managing the daily
operations of the Hotels and the one hotel owned by affiliates of Mr. Wirth.
We
are required to collect certain taxes and fees from customers on behalf of government agencies and remit these back to the applicable
governmental agencies on a periodic basis. We have a legal obligation to act as a collection agent. We do not retain these taxes
and fees and, therefore, they are not included in revenues. We record a liability when the amounts are collected and relieve the
liability when payments are made to the applicable taxing authority or other appropriate governmental agency.
IBC
Technologies Discontinued Operations
This
ASU became effective for the Trust beginning interim period February 1, 2018. Based on our evaluation of the new revenue recognition
standard the Trust presents revenue on a net basis for the period ending July 31, 2018.
ASU
2014-09 (Topic 606), “Revenue from Contracts with Customers) is effective for reporting period after January 1, 2018.
●
|
International
Vacation Hotels Travel (“IVH”) Transactional Business to Consumer (“B-to-C”) Revenues
|
|
●
|
IVH
Collect
- IVH will charge the guests in full on booking and remit the payments to
the Hotel for all completed stays for rates contracted less the agreed upon commission.
|
|
|
|
|
●
|
Hotel
Collect
- the Hotel will charge the guests in full upon arrival and IVH will invoice
the Hotel at the end of each month the agreed upon commission for the hotel guest stays
completed.
|
|
|
|
|
●
|
Split
- Guest pays deposit to IVH equal to the commission, provides credit card details
and pays the balance to the Member upon arrival.
|
●
|
IBC
Business to Business (“B-to-B”) Revenues
|
|
●
|
SaaS
Revenue – SaaS revenues which include CRS and digital marketing services are billed
on a monthly basis and paid for by the individual hotel properties the following month
services are provided.
|
|
|
|
|
●
|
Digital
Marketing revenues – Performance of professional services on a fixed price monthly basis.
|
INCOME
(LOSS) PER SHARE
Basic
and diluted (loss) income per Share of Beneficial Interest is computed based on the weighted-average number of Shares of Beneficial
Interest and potentially dilutive securities outstanding during the period. Dilutive securities are limited to the Class A and
Class B units of the Partnership, which are convertible into 3,185,746 Shares of the Beneficial Interest, as discussed in Note
1.
For
the periods ended July 31, 2018 and 2017, there were Class A and Class B Partnership units outstanding, which are convertible
into Shares of Beneficial Interest of the Trust. Assuming conversion at the beginning of each period, the aggregate weighted-average
of these Shares of Beneficial Interest would have been 3,185,746 and 3,308,414 in addition to the basic shares outstanding for
the periods ended July 31, 2018 and 2017, respectively. These Shares of Beneficial Interest issuable upon conversion of the Class
A and Class B Partnership units were dilutive during the period ended July 31, 2017 and are included in the calculation of diluted
earnings per share. These Shares of Beneficial Interest issuable upon conversion of the Class A and Class B Partnership units
during the period ended July 31, 2018 are excluded in the calculation of diluted loss per share as their effected would be anti-dilutive
as we reported a net loss for the period.
SEGMENT
REPORTING
As
a result of the sale of IBC (see Note 10), the Chief Operating Decision Maker (“CODM”), Mr. Wirth, CEO of the Trust,
has determined that the Trust operations are comprised of one reportable segment, Hotel Operations & Corporate Overhead (continuing
operations) segment that has ownership interest in three hotel properties with an aggregate of 424 suites in Arizona and New Mexico.
The Trust has a concentration of assets in the southwest United States and the southern Arizona market. Prior to the sale of IBC,
the Trust has previously determined that its operations were comprised of two reportable segments, a Hotel Operations & Corporate
Overhead segment that has ownership interest in three hotel properties with an aggregate of 424 suites in Arizona and New Mexico,
and the IBC Hospitality segment serving 2,000 unrelated hotel properties. In connection with the sale of IBC, the historical financial
information presented in this Form 10-Q reflects this change with IBC being reported as discontinued operation. On an overall
basis, the Trust has elected to only put the costs directly attributable to the IBC Hospitality in the discontinued operations.
Included in these costs are salaries, employee taxes and benefits, sales, marketing and technology development costs.
The
Trust has chosen to focus its hotel investments in the southwest region of the United States. The CODM does not review assets
by geographical region; therefore, no income statement or balance sheet information by geographical region is provided.
NON-CONTROLLING
INTEREST
Non-controlling
interest in the Trust represents the limited partners’ proportionate share of the capital and earnings of the Partnership.
Income or loss is allocated to the non-controlling interest based on a weighted average ownership percentage in the entities throughout
the period, and capital is allocated based on the ownership percentage at year-end. Any difference between the weighted average
and point-in-time allocations is presented as a reallocation of non-controlling interest as a component of shareholders’
equity.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
For
disclosure purposes, fair value is determined by using available market information and appropriate valuation methodologies. Fair
value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price)
in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability.
The fair value framework specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation
technique are observable or unobservable. The fair value hierarchy levels are as follows:
|
●
|
Level
1 – Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets
or liabilities that are identical to the assets or liabilities being measured.
|
|
●
|
Level
2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities
that are similar to the assets or liabilities being measured and / or quoted prices for assets or liabilities that are identical
or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in
which all significant inputs and significant value drivers are observable in active markets are level 2 valuation techniques.
|
|
|
|
|
●
|
Level
3 – Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable
inputs are valuation technique inputs that reflect a company’s own judgments about the assumptions that market participants
would use in pricing an asset or liability.
|
The
Trust has $3 million invested in Level 1 short-term bonds during the period ended July 31, 2018, and had no other assets or liabilities
carried at fair value on a recurring basis and had no fair value re-measurements during the period ended July 31, 2018.
Due
to their short maturities, the carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses approximate fair value. The fair value of mortgage notes payable, notes payable to banks and notes and advances payable
to related parties is estimated by using the current rates which would be available for similar loans having the same remaining
maturities.
3.
STOCK-BASED COMPENSATION
TRUSTEE
STOCK COMPENSATION
For
the three and six month periods ended July 31, 2018 and 2017, the Trust recognized expenses of $8,100 and $12,960 and $16,200
and $51,840, respectively, related to stock-based compensation. During the six months period ended July 31, 2018, the Trust issued
18,000 restricted shares with a total market value of $32,400 in the first fiscal quarter of fiscal year 2019 as compensation
to its three outside Trustees for fiscal year 2019. On a monthly basis through January 31, 2019, these shares vest at a rate of
approximately 500 shares for each outside Trustee. As of July 31, 2018, the remaining unamortized stock based compensation to
be recognized into stock based compensation over the next six months is approximately $16,000.
The
following table summarizes restricted share activity during the six months ended July 31, 2018:
|
|
Restricted
Shares
|
|
|
|
Shares
|
|
|
Weighted-Average
Per Share Grant Date Fair Value
|
|
Balance of
unvested awards at January 31, 2018
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
18,000
|
|
|
$
|
2.16
|
|
Vested
|
|
|
(9,000
|
)
|
|
$
|
2.16
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Balance
of unvested awards at July 31, 2018
|
|
|
9,000
|
|
|
$
|
2.16
|
|
4.
RELATED PARTY TRANSACTIONS
On
December 1, 2014, the Trust entered into a $1,000,000 net maximum Demand/Revolving Line of Credit/Promissory Note with Rare
Earth Financial, LLC, an entity which is wholly owned by Mr. Wirth and his family members. The Demand/Revolving Line of
Credit/Promissory Note, as amended on June 19, 2017, bears interest at 7.0% per annum for both a payable and receivable, is
interest only quarterly and matures on June 30, 2019. No prepayment penalty exists on the Demand/Revolving Line of
Credit/Promissory Note. The balance fluctuates significantly through the period. The Demand/Revolving Line of
Credit/Promissory Note has a net maximum borrowing/lending capacity of $1,000,000. As of July 31, 2018 and January 31, 2018,
the Trust had a an amount receivable of approximately $797,000, including accrued interest and $811,000, respectively. During
the six months period ended July 31, 2018, the Trust advanced approximately $9,000, received approximately $50,000 in
repayments and accrued approximately $27,000 of interest income.
As
of January 31, 2017, the Trust had an available Affiliate credit facility with a maximum borrowing/lending capacity of $500,000
to Tempe/Phoenix Airport Resort LLC. On June 19, 2017, the Board changed the terms of Tempe/Phoenix Airport Resort LLC Affiliate
credit facilities by increasing the borrowing capacity to $1,000,000 and changed the Maturity Date from June 30, 2017 to June
30, 2019, bears interest at 7.0% per annum for both a payable and receivable. As of July 31, 2018 and January 31, 2018, the Trust
had an amount receivable of approximately $870,000 and $970,000, respectively. During the six months period ended July 31, 2018,
the Trust accrued approximately $29,000 of interest income.
As
of July 31, 2018 and January 31, 2018, Mr. Wirth and his affiliates held 2,974,038 and 2,974,038 Class B Partnership units, which
represented 23.33% and 23.35% of the total outstanding Partnership units. As of July 31, 2018 and January 31, 2018, Mr. Wirth
and his affiliates held 7,048,462 and 6,939,429 respectively, Shares of Beneficial Interest in the Trust, which represented 73.09%
and 70.99%, respectively, of the total issued and outstanding Shares of Beneficial Interest. For the three and six months ended
July 31, 2018, Mr. Wirth’s affiliates paid the Trust approximately $40,000 and $100,000 respectively, for management and
licensing fees.
During
the six months period ended July 31, 2018, Ms. Pamela Barnhill, immediate family member to Mr. Jim Wirth, was employed by the
Trust and IBC and was paid approximately $78,000 for the six months period ended July 31, 2018.. The Trust also employs another
immediate family member of Mr. Wirth who provides technology support services to the Trust, receiving a $60,000 yearly salary.
Another immediate family member of Mr. Wirth provides investor relations support and services on an hourly basis, of which the
Trust has paid this individual approximately $11,000 during the six months period ended July 31, 2018.
5.
NOTES PAYABLE
On
August 24, 2012, the Yuma entity entered into a $5,500,000 mortgage loan with 1
st
Bank Yuma to refinance the then existing
term debt. The mortgage loan calls for a 10 year maturity date and an interest rate of the Wall Street Journal Prime Rate plus
one percentage point, with a floor of 5.0% per year. Prepayment fees exist for refinancing this debt with another lender until
the maturity date. As of July 31, 2018, the mortgage loan balance was approximately $4,764,000, net of a discount of approximately
$9,000. The related note payable is recorded under liabilities held for sale in the accompanying condensed balance sheet (see
Note 10).
On
May 11, 2017, Yuma Hospitality Properties, LLLP entered into a $850,000 Promissory Note Agreement (“Yuma Loan Agreement”)
as a credit facility to replenish funds for the hotel remodel with 1
st
Bank of Yuma Arizona Bank & Trust with a
maturity date of September 1, 2022. The Yuma Loan Agreement has an initial interest rate of 5.50% with a variable rate adjustment
equal to the Wall Street Journal Prime Rate plus 1.50% with a floor of 5.50% and no prepayment penalty. This credit facility is
guaranteed by InnSuites Hospitality Trust. As of July 31, 2018, the Promissory Note balance was approximately $819,000, net of
a discount of approximately $6,000. The Yuma Loan Agreement is recorded under liabilities held for sale in the accompany condensed
balance sheet (see Note 10).
On
January 8, 2016, in connection with the acquisition of substantially all of the assets of International Vacation Hotels, the Trust
entered into a $400,000 business loan with Laurence Holdings Limited, an Ontario, Canada corporation, with a maturity date of
February 1, 2019 pursuant to the terms of the Security Agreement and Promissory Note (the “Laurence Holdings Agreement”).
The Laurence Holdings Agreement required the funds be used for the purchase of International Vacation Hotels assets. The Laurence
Holdings Agreement provides for interest- only payments for the first three months of the term and principal and interest payments
for the remaining portion of the loan. The Laurence Holdings Agreement sets an interest rate of 8% per annum with no prepayment
penalty. As of July 31, 2018, the business loan was paid in full.
On
June 29, 2017, Tucson Hospitality Properties, LLLP, a subsidiary of InnSuites Hospitality Trust, entered into a $5.0 million Business
Loan Agreement (“Tucson Loan”) as a first mortgage credit facility with KS State Bank to refinance the existing first
mortgage credit facility with an approximate payoff balance of $3.045 million which will allow Tucson Hospitality Properties,
LLLP to be reimbursed for prior and future hotel improvements. The Tucson Loan has a maturity date of June 19, 2042. The Tucson
Loan has an initial interest rate of 4.69% for the first five years and thereafter a variable rate equal to the US Treasury +
2.0% with a floor of 4.69% and no prepayment penalty. This credit facility is guaranteed by InnSuites Hospitality Trust, RRF Limited
Partnership, Rare Earth Financial, LLC, James F. Wirth and Gail J. Wirth and the Wirth Family Trust dated July 14, 2016. As of
July 31, 2018, the Tucson Loan was approximately $4,872,000, net of a discount of approximately $5,000.
Scheduled
minimum payments of debt, net of debt discounts, as of July 31, 2018 are as follows in the respective fiscal years indicated:
FISCAL
YEAR
|
|
MORTGAGES
|
|
|
NOTES
PAYABLE
TO
BANK
|
|
|
OTHER
NOTES PAYABLE
|
|
|
TOTAL
|
|
|
|
(1)
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder
of 2019
|
|
$
|
190,401
|
|
|
$
|
97,715
|
|
|
$
|
1,112,333
|
|
|
$
|
1,400,449
|
|
2020
|
|
|
267,441
|
|
|
|
21,625
|
|
|
|
158,136
|
|
|
|
447,202
|
|
2021
|
|
|
278,588
|
|
|
|
22,868
|
|
|
|
140,491
|
|
|
|
441,947
|
|
2022
|
|
|
295,336
|
|
|
|
22,552
|
|
|
|
15,734
|
|
|
|
333,622
|
|
2023
|
|
|
4,333,180
|
|
|
|
741,570
|
|
|
|
-
|
|
|
|
5,074,750
|
|
Thereafter
|
|
|
4,327,629
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,327,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,692,575
|
|
|
$
|
906,330
|
|
|
$
|
1,426,694
|
|
|
$
|
12,025,599
|
|
(1)
Mortgage and Notes Payable for Yuma included in Discontinued Operations and Held for Sale
|
6.
SALE OF OWNERSHIP INTERESTS IN SUBSIDIARIES
During
the six months period ended July 31, 2018, there were 14.50 Class A units sold for $145,000 ($10,000/unit), of which 14.50 came
from the Trust’s Class B units, and no C units of the Albuquerque entity sold. As of July 31, 2018, and January 31, 2018,
the Trust held a 20.33% and 22.83% ownership interest, or 122 and 137 Class B units, in the Albuquerque entity, Mr. Wirth and
his affiliates held a 0.17% interest, or 1 Class C unit, and other third parties held a 79.50% interest, or 477 Class A units
as of July 31, 2018 and 79.25% or 475.5 units as of January 31, 2018. As of February 1, 2017, the Trust no longer accrues for
these distributions as the preference period generally has expired. During the three and six months period ended July 31, 2018
the Trust paid distributions in the amount of approximately $106,000, of which approximately $25,000 was to IHT, which were eliminated
during the consolidation process for reporting purposes and approximately $81,000 was to the third party non-controlling interest
holder and approximately $203,000, of which approximately $47,000 was to IHT, which were eliminated during the consolidation process
for reporting purposes, and approximately $156,000 was to the third party the non-controlling interest holders, respectively.
Subsequent to July 31, 2018, the Company made a distribution in the amount of approximately $105,000, of which approximately $83,000
was to the third party non-controlling interest holders.
During
the six months ended July 31, 2018, there were no Class A, B or C units of the Tucson entity sold. As of July 31, 2018, and January
31, 2018, the Partnership held a 51.01% ownership interest, or 404 Class B units, in the Tucson entity, Mr. Wirth and his affiliates
held a 0.38% interest, or 3 Class C units, and other parties held a 48.6% interest, or 385 Class A units. As of February 1, 2017,
the Trust no longer accrues for these distributions as the preference period generally has expired. During the three and six months
period ended July 31, 2018 the Trust paid distributions in the amount of approximately $0 and approximately $139,000, of which
approximately $71,000 was to RRF Limited Partnership, which were eliminated during the consolidation process for reporting purposes,
and approximately $68,000 was to the third party the non-controlling interest holders, respectively.
During
the six months ended July 31, 2018, there were no Class A, B or C units of the Yuma entity sold. As of July 31, 2018, the Trust
held a 12.79% ownership interest, or 102.30 Class B units, in the Yuma entity, Mr. Wirth and his affiliates held a 0.63% interest,
or 5 Class C units, and other parties held a 86.59% interest, or 692.70 Class A units. As of February 1, 2017, the Trust no longer
accrues for these distributions as the preference period generally has expired. During the three and six months period ended July
31, 2018 the Company paid distributions in the amount of approximately $140,000, of which approximately $18,000 was to IHT, which
were eliminated during the consolidation process for reporting purposes, and approximately $122,000 was to the third party non-controlling
interest holder and approximately $280,000, of which approximately $50,000 was to IHT, which were eliminated during the consolidation
process for reporting purposes, and approximately $230,000 was to the third party non-controlling interest holders, respectively.
Subsequent to July 31, 2018, the Company made a distribution in the amount of approximately $140,000, of which approximately $121,000
was to the third party non-controlling interest holders.
7.
VARIABLE INTEREST ENTITY
Management
evaluates the Trust’s explicit and implicit variable interests to determine if they have any variable interests in VIEs.
Variable interests are contractual, ownership, or other pecuniary interests in an entity whose value changes with changes in the
fair value of the entity’s net assets, exclusive of variable interests. Explicit variable interests are those which directly
absorb the variability of a VIE and can include contractual interests such as loans or guarantees as well as equity investments.
An implicit variable interest acts the same as an explicit variable interest except it involves the absorbing of variability indirectly,
such as through related party arrangements or implicit guarantees. The analysis includes consideration of the design of the entity,
its organizational structure, including decision making ability over the activities that most significantly impact the VIE’s
economic performance. GAAP requires a reporting entity to consolidate a VIE when the reporting entity has a variable interest,
or combination of variable interest, that provides it with a controlling financial interest in the VIE. The entity that consolidates
a VIE is referred to as the primary beneficiary of that VIE.
The
Partnership has determined that the Yuma and Albuquerque entities are variable interest entities with the Partnership as the primary
beneficiary with the ability to exercise control, as determined under the guidance of ASC Topic 810-10-25. In its determination,
management considered the following qualitative and quantitative factors:
a)
The Partnership, Trust and their related parties, which share common ownership and management, have guaranteed material financial
obligations of the Yuma entity and Albuquerque, including its mortgage note payable and distribution obligations, which based
on the capital structure of the Yuma entity, management believes could potentially be significant.
b)
The Partnership, Trust and their related parties have maintained, as a group, a controlling ownership interest in the Albuquerque
entity and Yuma, with the largest ownership belonging to the Partnership.
c)
The Partnership, Trust and their related parties have maintained control over the decisions which most impact the financial performance
of the Yuma entity, including providing the personnel to operate the property on a daily basis.
On
July 31, 2018, the Trust entered into a sale and purchase agreement for the sale of the Yuma Hotel. As a result, the trust has
classified the Yuma operations as held for sale in the accompanying condensed balance sheet as of July 31, 2018 and January 31,
2018 (see Note 10).
8.
STATEMENTS OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES
The
Trust paid approximately $330,000 and $230,000 in cash for interest for the six months period ended July 31, 2018 and 2017, respectively
for continuing operations. The Trust paid approximately $0 and $20,000 for taxes for the six months period ended July 31, 2018
and 2017, respectively for continuing operations.
Capital
expenditures from discontinued operations were approximately $38,000 for the six months period ended July 31, 2017.
Dividends
accrued but not paid were approximately $99,000 and $0 for the six months period ended July 31, 2018 and 2017, respectively.
Purchase
of treasury stock on notes payable were approximately $472,000 and $0 for the six months period ended July 31, 2018 and 2017,
respectively.
9.
COMMITMENTS AND CONTINGENCIES
The
Albuquerque Hotel is subject to a non-cancelable ground lease that expires in 2058. Total expense associated with the non-cancelable
ground lease for the three and six months ended July 31, 2018 and 2017 was approximately $38,000 and $37,000, respectively and
approximately $75,000 and $75,000, respectively. Deferred rent was approximately $145,000 at of July 31, 2018 and is recorded
under accrued expenses in the accompanying condensed consolidated balance sheet.
On
August 4, 2017, the Trust entered into a five year office lease agreement with Northpoint Properties for a commercial office lease
at 1730 E Northern Ave, Suite 122, Phoenix, Arizona 85020 commencing on September 1, 2017. Base monthly rent of $4,100 increases
6% on a yearly basis. No rent is due for October 2018 and October 2022 months. The Trust also agreed to pay electricity and applicable
sales tax. The office lease agreement provides early termination with a 90 day notification with an early termination fee of $12,000,
$8,000, $6,000, $4,000 and $2,000 for years 1 – 5 of the lease term, respectively. Rent expense on this lease agreement
for the three and six months period ended July 31, 2018 was approximately $14,000 and $28,000. Deferred rent was approximately
$6,000 at July 31, 2018 and is recorded under accrued expenses in the accompanying condensed consolidated balance sheet. Rent
expense incurred by the Trust for the three and six months period ended July 31, 2017 was approximately $9,000 and $18,000, respectively.
Future
minimum lease payments under the non-cancelable ground leases are as follows:
Fiscal
Year Ending
|
|
|
|
Remainder
of FY 2019
|
|
|
109,507
|
|
FY 2020
|
|
|
167,225
|
|
FY 2021
|
|
|
170,448
|
|
FY 2022
|
|
|
173,864
|
|
FY 2023
|
|
|
144,565
|
|
Thereafter
|
|
|
5,473,313
|
|
Total
|
|
|
6,238,922
|
|
The
Trust is obligated under a loan agreement relating to the Tucson Oracle property to deposit 4% of the individual hotel’s
room revenue into an escrow account to be used for capital expenditures. The escrow funds applicable to the Tucson Oracle property
for which a mortgage lender escrow exists are not reported on the Trust’s Consolidated Balance Sheet as “Restricted
Cash” as the balance was deminimus as of July 31, 2018 and January 31, 2018.
InnSuites
Hotels has entered into membership agreements with Best Western International, Inc. (“Best Western”) with respect
to all three of the Hotels. In exchange for use of the Best Western name, trademark and reservation system, the participating
Hotels pay fees to Best Western based on reservations received through the use of the Best Western reservation system and the
number of available suites at the participating Hotels. The agreements with Best Western have no specific expiration terms and
may be cancelled by either party. Best Western requires that the participating hotels meet certain requirements for room quality,
and the Hotels are subject to removal from its reservation system if these requirements are not met. The Hotels with third-party
membership agreements received significant reservations through the Best Western reservation system. Under these arrangements,
fees paid for membership fees and reservations were approximately $63,000 and $77,000 for the three months ended July 31, 2018
and 2017, respectively, and approximately $126,000 and $162,000 for the six months ended July 31, 2018 and 2017, respectively.
The
nature of the operations of the Hotels exposes them in most cases to risks of claims and litigation in the normal course of their
business. Although the outcome of these matters cannot be determined and is covered by insurance, management does not expect that
the ultimate resolution of these matters will have a material adverse effect on the consolidated financial position, results of
operations or liquidity of the Trust.
The
Trust is involved from time to time in various other claims and legal actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Trust’s
consolidated financial position, results of operations or liquidity.
Indemnification:
We
have entered into indemnification agreements with all of our executive officers and Trustees. The agreements provide for indemnification
against all liabilities and expenses reasonably incurred by an officer or Trustee in connection with the defense or disposition
of any suit or other proceeding, in which he or she may be involved or with which he or she may be threatened, while in office
or thereafter, because of his or her position at the Trust. There is no indemnification for any matter as to which an officer
or Trustee is adjudicated to have acted in bad faith, with willful misconduct or reckless disregard of his or her duties, with
gross negligence, or not in good faith in the reasonable belief that his or her action was in our best interests. These agreements
require us, among other things, to indemnify the director or officer against specified expenses and liabilities, such as attorneys’
fees, judgments, fines and settlements, paid by the individual in connection with any action, suit or proceeding arising out of
the individual’s status or service as our director or officer, other than liabilities arising from willful misconduct or
conduct that is knowingly fraudulent or deliberately dishonest, and to advance expenses incurred by the individual in connection
with any proceeding against the individual with respect to which the individual may be entitled to indemnification by us. We may
advance payments in connection with indemnification under the agreements. The level of indemnification is to the full extent of
the net equity based on appraised and/or market value of the Trust. Historically, we have not incurred any payments for these
obligations and, therefore, no liabilities have been recorded for these indemnities in the accompanying consolidated balance sheets.
Legal
From
time to time, various lawsuits and legal proceedings may arise in the ordinary course of business. However, litigation is subject
to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business.
We are currently not aware of any legal proceedings or claims that it believes will have a material adverse effect on its business,
financial condition or operating results.
10.
Discontinued Operations and Assets Held for Sale
Discontinued
operations
Discontinued
operations during the six months period ended July 31, 2018 consist of the operations from the IBC subsidiary. On August 15, 2018
Innsuites Hospitality Trust (IHT) entered into a final sale agreement for its subsidiary IBC Hotels LLC (IBC) with an effective
sale date as of August 1, 2018 to a third party buyer (Buyer). The third-party purchaser hired IHT’s former Chief Operating
Officer, who is a family member of IHT’s CEO. The sale price was $3,000,000 to be paid to IHT as follows:
|
1.
|
$250,000
at closing, which was received on August 14, 2018;
|
|
2.
|
A
secured promissory note in the principal amount of $2,750,000 with interest to be accrued at 3.75% per annum. Interest shall
accrue for the first 10 months (starting August 2018), thereafter for month 11 and 12 principal and interest payments of 50%
($25,632 per month), then the remaining amount to be amortized over 59 months (payments of $52,054 per month) with maturity
in June 2024.
|
Note
is secured by (1) pledge of the Buyer’s interest, and (2) a security interest in all assets of IBC, provided IHT shall agree
to subordinate such equity interest to commercially reasonable debt financing upon request.
If
after effective date IBC closes an equity transaction with net proceeds to IBC in excess of $2,500,000, IBC/Buyer shall pay to
IHT an amount equal to (a) 50% of the net proceeds received by IBC and (b) 50% of the sum of the unpaid balance of the note and
accrued interest accrued but unpaid interest thereon, as the date of receipt of the net proceeds by IBC.
IHT
has agreed to provide continuing working capital support for a period of six months in the amount of approximately $37,500 per
month to IBC for transitional purposes. IHT has no managerial control nor does IHT have the ability to direct the operations or
capital requirements of IBC as of August 1, 2018. IHT has no rights to any benefits or losses from IBC as of August 1, 2018.
Default
If
Buyer has not paid two or more payments on the note as scheduled, or if Buyer has not made any other provisions in the note, IHT
may give Buyer notice of default. If Buyer fails to cure the default within 30 days after notice (a) on or before February 5,
2020, then 75% of the issued and outstanding IBC interest shall be transferred to IHT, and (b) on or after February 5, 2020, then
51% of the issued and outstanding interest of the Company shall be transferred to IHT.
Debt/Working
Capital adjustment
On
or before the sixty calendar days following the effective date (August 1, 2018) Buyer shall prepare and deliver to IHT a written
statement (closing statement) setting forth a calculation of the aggregate amount of (i) all indebtedness, (ii) working capital
of IBC as of the close of business on the last business day immediately preceding the effective date (closing net working capital)
, and (iii) a proposed adjustment to the principal amount of the note payable, calculated as follows:
|
●
|
If
the closing new working capital is between $0 and negative $100,000, the purchase price shall not be adjusted;
|
|
●
|
If
the closing working capital is less then negative $100,000, the principal amount of the note shall be deceased in amount equal
to the amount by which the closing net working capital is greater than negative $100,000; and
|
|
●
|
Of
the closing working capital is greater than $0, the principal amount of the note shall be increased in an amount equal to
the closing working capital.
|
Office
Lease/Contracts
IHT
will maintain an existing reservation center contract with IBC requiring IHT to make payments of $7,500 per month for a minimum
of 6 months after closing.
IHT
will continue to rent office space to IBC on the same terms and conditions as in effect currently on a month to month basis at
a monthly rent of approximately $2,500, terminable by either IHT or IBC on a 30-day prior written notice.
Indemnification
IHT
has agreed to indemnify and hold harmless the Buyer from and against any and all losses suffered, sustained or incurred by any
Buyer indemnified party, resulting from, arising in connection with or related to (i) any breach of a representation or warranty
made by IHT, (ii) any breach of a seller fundamental representation by IHT, (iii) any breach of any covenant made by IHT in this
agreement, certification or writing delivered pursuant to the agreement, (iv) any claims or liabilities under, related to or in
connection with any person status as a security holder of the company prior to closing, or (v) any transaction expense or indebtedness
not accounted for in the final determination of the purchase price.
Assets
Held For Sale
On
July 31, 2018, IHT entered into a purchase and sale agreement to sell its Innsuites Yuma Hotel and Suites Best Western (Yuma),
together with certain furniture, fixtures, equipment, operating supplies and other ancillary items pertaining to the daily operations
to a third party. The sales price is $16.25 million, with an earnest money deposit of $200,000 which was deposited into escrow
in August 2018. The remainder will be paid in cash at close of sale. The buyer has approximately 90 days to perform its due diligence
with the transaction expected to close sometime in late October 2018. As a result of the pending sale, the Trust has reclassified
the Yuma Hotel operations as assets and liabilities held for sale as of July 31, 2018 and restated January 31, 2018 financial
information for comparable purposes.
The
following tables lists the assets of discontinued operations and held for sale and liabilities of discontinued operations and
held for sale as of the July 31, 2018 and January 31, 2018 and the discontinued operations for IBC for the three and six months
period ended July 31, 2018 and IBC and Ontario for the and three and six months period July 31, 2017
DISCONTINUED
OPERATIONS & HELD FOR SALE
|
|
|
|
|
|
|
|
|
|
|
|
|
JULY
31, 2018
|
|
|
|
Total
|
|
|
Yuma
|
|
|
IBC
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
215,445
|
|
|
|
218,643
|
|
|
|
(3,198
|
)
|
Accounts
Receivable
|
|
|
136,363
|
|
|
|
44,893
|
|
|
|
91,470
|
|
Prepaid
Expenses and Other Current Assets
|
|
|
74,449
|
|
|
|
13,680
|
|
|
|
60,769
|
|
Total
Current Assets of Discontinued Operations
|
|
|
426,257
|
|
|
|
277,216
|
|
|
|
149,041
|
|
Property,
Plant and Equipment, net
|
|
|
5,144,983
|
|
|
|
4,665,764
|
|
|
|
479,219
|
|
TOTAL
ASSETS OF DISCONTINUED OPERATIONS AND HELD FOR SALE
|
|
$
|
5,571,240
|
|
|
|
4,942,980
|
|
|
|
628,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Payable and Accrued Expenses
|
|
$
|
402,869
|
|
|
|
201,990
|
|
|
|
200,879
|
|
Current
Portion of Mortgage Notes Payable
|
|
|
168,875
|
|
|
|
168,875
|
|
|
|
|
|
Total
Current Liabilities of Discontinued Operations
|
|
|
571,744
|
|
|
|
370,865
|
|
|
|
200,879
|
|
Mortgage
Notes Payable
|
|
|
5,413,382
|
|
|
|
5,413,382
|
|
|
|
|
|
TOTAL
LIABILITIES OF DISCONTINUED OPERATIONS AND HELD FOR SALE
|
|
$
|
5,985,126
|
|
|
|
5,784,247
|
|
|
|
200,879
|
|
DISCONTINUED
OPERATIONS & HELD FOR SALE
|
|
|
|
JANUARY
31, 2018
|
|
|
|
Total
|
|
|
Yuma
|
|
|
IBC
|
|
|
Ontario
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
200,705
|
|
|
|
178,317
|
|
|
|
22,388
|
|
|
|
|
|
Accounts
Receivable
|
|
|
265,377
|
|
|
|
70,139
|
|
|
|
195,238
|
|
|
|
|
|
Prepaid
Expenses and Other Current Assets
|
|
|
25,447
|
|
|
|
10,803
|
|
|
|
14,644
|
|
|
|
|
|
Total
Current Assets of Discontinued Operations
|
|
|
491,529
|
|
|
|
259,259
|
|
|
|
232,270
|
|
|
|
-
|
|
Property,
Plant and Equipment, net
|
|
|
5,240,535
|
|
|
|
4,815,664
|
|
|
|
424,871
|
|
|
|
|
|
TOTAL
ASSETS OF DISCONTINUED OPERATIONS AND HELD FOR SALE
|
|
$
|
5,732,064
|
|
|
|
5,074,923
|
|
|
|
657,141
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Payable and Accrued Expenses
|
|
$
|
607,941
|
|
|
|
269,242
|
|
|
|
251,723
|
|
|
|
86,976
|
|
Current
Portion of Mortgage Notes Payable
|
|
|
289,098
|
|
|
|
165,239
|
|
|
|
123,859
|
|
|
|
|
|
Total
Current Liabilities of Discontinued Operations
|
|
|
897,039
|
|
|
|
434,481
|
|
|
|
375,582
|
|
|
|
86,976
|
|
Mortgage
Notes Payable
|
|
|
5,490,374
|
|
|
|
5,490,374
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES OF DISCONTINUED OPERATIONS AND HELD FOR SALE
|
|
$
|
6,387,413
|
|
|
|
5,924,855
|
|
|
|
375,582
|
|
|
|
86,976
|
|
|
|
FOR
THE SIX MONTHS ENDED
|
|
|
|
|
|
|
JULY
31,
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
Ontario
|
|
|
IBC
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reservation
and Convention
|
|
$
|
265,679
|
|
|
$
|
1,992,267
|
|
|
$
|
1,470,743
|
|
|
$
|
521,524
|
|
TOTAL
REVENUE
|
|
|
265,679
|
|
|
|
1,992,267
|
|
|
|
1,470,743
|
|
|
|
521,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room
|
|
|
|
|
|
|
936,647
|
|
|
|
939,663
|
|
|
|
(3,016
|
)
|
Food
and Beverage
|
|
|
|
|
|
|
66,152
|
|
|
|
66,152
|
|
|
|
-
|
|
General
and Administrative
|
|
|
406,921
|
|
|
|
802,811
|
|
|
|
256,986
|
|
|
|
545,825
|
|
Sales
and Marketing
|
|
|
347,610
|
|
|
|
611,755
|
|
|
|
123,299
|
|
|
|
488,456
|
|
Reservation
Acquisition Costs
|
|
|
142,842
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Depreciation
|
|
|
51,008
|
|
|
|
227,525
|
|
|
|
177,824
|
|
|
|
49,701
|
|
Other
|
|
|
|
|
|
|
390,337
|
|
|
|
356,837
|
|
|
|
33,500
|
|
TOTAL
OPERATING EXPENSES
|
|
|
948,382
|
|
|
|
3,035,227
|
|
|
|
1,920,761
|
|
|
|
1,114,466
|
|
OPERATING
LOSS
|
|
|
(682,702
|
)
|
|
|
(1,042,959
|
)
|
|
|
(450,018
|
)
|
|
|
(592,941
|
)
|
Interest
on Notes Payable to Banks
|
|
|
3,725
|
|
|
|
137,994
|
|
|
|
127,254
|
|
|
|
10,740
|
|
TOTAL
INTEREST EXPENSE
|
|
|
3,725
|
|
|
|
137,994
|
|
|
|
127,254
|
|
|
|
10,740
|
|
CONSOLIDATED
NET LOSS OF DISCONTINUED OPERATIONS AND HELD FOR SALE
|
|
$
|
(686,427
|
)
|
|
$
|
(1,180,953
|
)
|
|
$
|
(577,272
|
)
|
|
$
|
(603,681
|
)
|
|
|
FOR
THE THREE MONTHS ENDED
|
|
|
|
|
|
|
JULY
31,
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
Ontario
|
|
|
IBC
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reservation
and Convention
|
|
$
|
135,498
|
|
|
$
|
662,699
|
|
|
$
|
372,485
|
|
|
$
|
290,214
|
|
TOTAL
REVENUE
|
|
|
135,498
|
|
|
|
662,699
|
|
|
|
372,485
|
|
|
|
290,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room
|
|
|
|
|
|
|
644,224
|
|
|
|
645,177
|
|
|
|
(953
|
)
|
Food
and Beverage
|
|
|
|
|
|
|
17,707
|
|
|
|
17,707
|
|
|
|
-
|
|
General
and Administrative
|
|
|
179,241
|
|
|
|
446,158
|
|
|
|
115,581
|
|
|
|
330,577
|
|
Sales
and Marketing
|
|
|
96,634
|
|
|
|
312,749
|
|
|
|
63,996
|
|
|
|
248,753
|
|
Reservation
Acquisition Costs
|
|
|
(46,735
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Depreciation
|
|
|
(7,043
|
)
|
|
|
95,922
|
|
|
|
52,684
|
|
|
|
43,238
|
|
Other
|
|
|
|
|
|
|
167,960
|
|
|
|
162,978
|
|
|
|
4,982
|
|
TOTAL
OPERATING EXPENSES
|
|
|
222,097
|
|
|
|
1,684,721
|
|
|
|
1,058,123
|
|
|
|
626,598
|
|
OPERATING
LOSS
|
|
|
(86,599
|
)
|
|
|
(1,022,021
|
)
|
|
|
(685,638
|
)
|
|
|
(336,383
|
)
|
Interest
(net)
|
|
|
1,173
|
|
|
|
62,905
|
|
|
|
62,905
|
|
|
|
-
|
|
TOTAL
INTEREST EXPENSE
|
|
|
1,173
|
|
|
|
62,905
|
|
|
|
62,905
|
|
|
|
-
|
|
CONSOLIDATED
NET LOSS OF DISCONTINUED OPERATIONS AND HELD FOR SALE
|
|
$
|
(87,772
|
)
|
|
$
|
(1,084,926
|
)
|
|
$
|
(748,543
|
)
|
|
$
|
(336,383
|
)
|
11.
STOCKHOLDERS EQUITY
Repurchase
of Stock and Units
In
June 2018 the Trust entered into a Note Payable with an investor for $172,000. The Note Payable has a maturity date of May 2021
and is related to the repurchase of 60,000 shares of IHT Stock. The note payable is due in equal monthly payments of approximately
$5,435 with 7% interest per annum. No prepayment penalty exists. The outstanding balance at July 31, 2018 was approximately $172,000.
In
March 2018 the Trust entered into a Note Payable with an investor for approximately $124,000. The Note Payable has a maturity
date of March 2021 and is related to the repurchase of 41,167 shares of IHT Stock. The note payable is due in equal monthly payments
of approximately $3,825 with 7% interest per annum. No prepayment penalty exists. The outstanding balance at July 31, 2018 was
approximately $111,000.
In
April 2018 the Trust entered into a Note Payable with an investor for approximately $140,000. The Note Payable has a maturity
date of February 2021 and is related to the repurchase of 93,247 shares of IHT Stock. The note payable is due in equal monthly
payments of approximately $4,325 with 7% interest per annum. No prepayment penalty exists. The outstanding balance at July 31,
2018 was approximately $122,000.
In
May 2018 the Trust entered into a Note Payable with an investor for approximately $13,000. The Note Payable has a maturity date
of August 2021 and is related to the repurchase of 5,827 shares of IHT Stock. The note payable is due in equal monthly payments
of approximately $400 with 7% interest per annum. No prepayment penalty exists. The outstanding balance at July 31, 2018 was approximately
$9,500.
In
June 2018, the Trust entered into a severance agreement with its former CFO in which is was agreed that the Trust would repurchase
10,500 shares of IHT stock at a price of $2.14 per share, the original exercise price. No prepayment penalty exists. The note
payable matures in September 2020, with monthly payments of approximately $970 per month, including interest at 7% per annum,
beginning in September 2018. The outstanding balance was approximately $22,500 at July 31, 2018.
During
the six months period ended July 31, 2018, the Trust repurchased 55,686 shares of common stock on the open mark on various dates
for a total cash purchase price of approximately $97,000.
The
Trust has recorded the above transactions as treasury stock under stockholders’ equity in the accompanying condensed balance
sheet as of July 31, 2018. In addition, pursuant to the above notes payable, the Company made down payments related to the purchase
of the treasury stock of approximately $13,000 in aggregate to the various note holders..
Dividends
The
Trust had originally declared a dividend on June 19, 2018, of $0.01 per share payable on July 31, 2018 to shareholders of record
as of July 16, 2018. However, the Trust rescinded the original dividend and re-declared the dividend on July 26,2018 with a date
of record as of August 8, 2018 and paid on August 20, 2018 in the amount of approximately $99,000. Therefore, the Trust has accrued
the dividend under dividend payable in the amount of approximately $99,000 in the accompanying condensed balance sheet at July
31, 2018.
Sale
of Shares or Units
During
the six months ended July 31, 2018, there were 14.50 Class A units sold for $145,000 ($10,000/unit), of which 14.50 came from
the Trust’s Class B units of the Albuquerque entity.
12.
INCOME TAXES
During
the three and six months period ended July 31, 2018, the Trust recorded approximately $220,000 in the accompanying condensed statement
of operations for related tax payable true-ups related to prior year tax return related primarily to the sale of Ontario hotel
operations resulting in a tax payable of approximately $550,000. The Trust’s practice is to recognize interest and/or penalties
related to income tax matters in income tax expense. The Trust believes it has no material accrued interest or penalties at July
31, 2018 and January 31, 2018. The Trust has received various IRS and state tax jurisdiction notices which the Trust in the process
of responding to in which management believes the notices are without merit and expect full remediation of all tax notices.
13.
SUBSEQUENT EVENTS
Subsequent
to the six months period ended July 31, 2018, the Trust repurchased 85,282 shares of common stock on the open mark on various
dates for a total cash purchase price of approximately $140,000.
Subsequent
to the six months period ended July 31, 2018, the Trust loaned approximately $140,000 to Rare Earth Financial, LLC, an entity
which is wholly owned by Mr. Wirth and his family members.